Securitisation of mortgages

15 April 2010

Introduction
The purpose of this article is to deal with the practical implications of Chief Registrar's Circular 12 of 2007 and not with securitisation as such.

Although a bad connotation has recently been attached to securitisation due to the securitisation of so-called sub-prime home loans in the USA, which to a large extent prompted the current credit crunch, securitisation remains one of the most feasible funding options available to banks and other financial institutions.

What is securitisation?
Securitisation involves the pooling and repackaging of cash-flow producing financial assets into securities which are then sold to investors. In general, any asset with a future cash-flow can be securitised, whether it be credit card books, vehicle financing or home loans.
Securitisation can take on many shapes and sizes. A simple example is contained in the sketch below.

Why bonds are ceded to a Special Purpose Vehicle (SPV)
A registered mortgage bond has a dual character - a moveable or personal right character and a real right character. The loan agreement between the bank and a client constitutes the movable side of the bond and the registration of the bond constitutes the real right side of the bond.

As will be noted from the sketch, an essential part of the securitisation process entails the cession of mortgage bonds to a SPV.

The bank can cede its right title and interest in and to the movable part of a bond by agreement. There is no need for the registration of such cession and the cessionary becomes the owner of the movable part on conclusion of the agreement and fulfilment of the terms and conditions of such cession agreement.

However, in order to cede the real right portion of the bond, an out and out cession of the bond is required, which cession is to be registered in the Deeds Office. Cessions for securitisation purposes are thus not cessions in securitatem debiti but out and out cessions.

Securitisation transactions are furthermore structured in such a manner that the SPV has no exposure whatsoever to the credit risk of the bank. This entails that both the movable and the real right portion of bonds are transferred to a SPV. The cession of bonds to SPVs isolate the bonds from the insolvency risk of banks, as the SPVs and banks are treated as separate entities in insolvency.

Background to the Issue of CRC 12 of 2007
Securitisation transactions in general require that the mortgage bonds forming part of such transactions are ceded to a SPV within a certain period of time.

These transactions normally involve billions of Rands with the result that thousands of mortgage bonds are to be ceded within a relatively short period of time. This creates various practical difficulties, mainly due to the fact that the original bond documents have to be lodged in the Deeds Office.

The original bond documents are not always immediately available as these bonds could inter alia be in the Deeds Offices or with the registering or correspondent attorneys' offices or they could have been required for other registration purposes such as releases, section 4(1)(b)s et cetera. Once the bonds are dispatched to the cession attorneys these bonds will furthermore not be available for any other transactions for quite some time and this in turn impacts on banks' customer service levels.

The Chief Registrar of Deeds and the Regulation Board were subsequently approached to relax the requirement of regulation 63(2) upon such terms and conditions as the Registrar considers sufficient and adequate to uphold the integrity of the registration process. After comprehensive presentations were made, the Chief Registrar issuedCRC12 of 2007.

The Contents of CRC12 of 2007
CRC 12 of 2007 authorises the lodgement of copies of mortgage bonds which are to be ceded for securitisation purposes should such bonds not be available at the time that they are required for cession purposes.

The requirements for the cessions of mortgage bonds for securitisation purposes in terms of CRC 12 of 2007 are as follows:

The cession drafted in accordance with form MM;

An affidavit/declaration by the bondholder (the bank) that the cession of the bond is required for securitisation purposes and that the client's copy of the bond is unavailable;

A copy of the mortgage bond issued for securitisation purposes and endorsed "Certified a true copy of the registry duplicate and issued for securitisation purposes";

A caveat drafted in a form acceptable to the Registrar of Deeds stating that the original mortgage bond is to be endorsed to the effect that it has been ceded, if and when such bond is lodged at the Registrar's office for whatever reason.

Copies of the bonds are issued by the respective Registrars prior to lodgement and are destroyed before delivery.

The costs for the issue of the copy of the bond is that of a deed as envisaged in Item 3(a) of the Schedule of Fees of Office prescribed by regulation 84.

Conclusion
A major securitisation project was recently successfully finalised within the deadline solely due to the implementation of CRC 12 of 2007.

The Chief Registrar of Deeds and the Registrars of Deeds countrywide are to be congratulated for their pragmatic approach in providing a framework within which the cessions of bonds in terms of such securitisation projects could be timeously finalised.